What do we need to do to retire early?

jacquie

Hi getting to that stage of life where we need to look at our finances and decide if we need to change things to prepare for retirement.

Hubby is 54 and as a final salary pension which he has paid into for coming up to 21 years. He also as a pension from a previous employer which we transferred around 1987/88 to what was then Guardian Royal. This at the time would guarantee him a pension of £8000+ when he retired (plus bonuses which are given each year and also guaranteed) This figure has now risen (down to about 0.5% per year now) to slightly over £15,000. Terminal bonuses are also given but projected at Nil.

I am no expert but given that a lot of pensions have lost money over the years am I right in thinking that although the pension with Guardian Royal has not grown considerably over the past years the fact thats its a guaranteed amount makes me think that it is ok.

I could be totally wrong in this assumption. Maybe it would be better to transfer this pension? Anyway looking for advice while hopefully time to prepare for retirement.

I am self-employed. No private pension but pay NI and should receive full state pension.

Look forward to your comments.

EdInvestor

He also as a pension from a previous employer which we transferred around 1987/88 to what was then Guardian Royal. This at the time would guarantee him a pension of £8000+ when he retired (plus bonuses which are given each year and also guaranteed) This figure has now risen (down to about 0.5% per year now) to slightly over £15,000. Terminal bonuses are also given but projected at Nil.

I would suggest you write for full details of this policy.Is it a "Section 32 buyout bond?" If so it will have a Guaranteed Minimum Pension (GMP) amount which must be paid by the insurer even if the fund is not big enough to produce an annuity of that size - which is often the case these days.

I would suggest you confirm the existence of the guarantee and how much the pension will be at retirement age ( sometimes the GMP gets revalued upwards over the years - which seems to be what you're saying here).

the fact thats its a guaranteed amount makes me think that it is ok.

Hopefully you are right - and if so this looks like a valuable pension you have got

However I doubt it will allow you to retire early.Normally to get these valuable guarantees you have to adhere exactly to the terms of the policy including the {retirement date.

It can be possible to retire earlier than the NRD with a final salary pension - but again the terms they offer can seriously reduce the size of the pension.

jacquie

Thank you very much for your reply.

I have the full policy details. I just get confused with all the jargon. It is definitely a Buy-Out Policy - no mention of Section 32. All figures quoted are definitely guaranteed and I think that is why this year and likely to retirement it is only likely to increase by 0.5%. Obviously we struggle to make exact sense of the policy when we read it but right from day one the advice we had was to go for the guaranteed figures and not the projected ones. I think this was good advice as all profits are now limited and terminal bonuses are non existant.

When my dh joined his existing scheme, over 20 years ago, he wondered about transferring this pension into his existing one. The company secretary at that time advised him not to as he thought that this pension had performed remarkably and did not think it was in his interest to transfer.

I think if my husband decides to retire early we will definite leave this policy until his normal retirement date and then consider what options we have.

Regards

EdInvestor

There are two reasons this guarantee will now be pretty valuable:

1) the value of the fund itself will have fallen, becaise of the stockmarket crash - perhaps by as much as half

and

2)The cost of buying the pension income (the annuity) has more or less doubled.

For instance, the cost of buying the equivalent of the basic (index linked) state pension ( 4,400 pounds a year) for a man aged 65 is now 120,000 pounds. So if your husband is due for an 8k a year pension, the amount needed to pay for that is going to be in the 250k range.

How much is your fund worth? If there's a shortfall, the insurance company has to pay the difference.

When you work out how much extra the insurance company will have to stump up to provide a 15k a year pension for your husband, you'll no doubt find it's a good enough reason to break out the Champagne.

It's nice to see there is the occasional winner emerging from the pensions mess. :T

ABN

jacquie wrote:

Hubby is 54 and as a final salary pension which he has paid into for coming up to 21 years. He also as a pension from a previous employer which we transferred around 1987/88 to what was then Guardian Royal. This at the time would guarantee him a pension of £8000+ when he retired (plus bonuses which are given each year and also guaranteed) This figure has now risen (down to about 0.5% per year now) to slightly over £15,000. Terminal bonuses are also given but projected at Nil.

Your hubby is a similar age to me :0

Are the figures for the first pension p/a (as assumed by edinvestor) or are they the amount of the pension fund?

The reason I ask is that he must only been paying into that fund for about 15yrs and "normal" salaries in those days were fairly low. I was paying into a company pension fund for a similar time and my expected pension from that fund is around £750 p/a at 65.
But perhaps he had a much better job than I, electronics engineers were not that highly paid, or had a damn good pension scheme.

jacquie

Hello EdInvestor

Thank you again for your reply it is much appreciated.

How much is your fund worth? If there's a shortfall, the insurance company has to pay the difference.

We have never had any information regarding what the fund is worth. I have no idea. Each year we get a statement. The original pension was £8,674.08 and grew quite steeply in the first few years. Bonuses are only added to the original amount (ie % of £8,6674.08) but each years bonuses are added to the previous years bonuses and then become the new guaranteed pension. This year for instance it was only 0.5% which equalled £43.38. If it stayed at this rate final pension would probably be about £15,500. It does however seem quite unusual not to know the fund value. Then again we don't know the fund value of his final salary pension scheme. It all depends on his final three years salary... It is all so confusing. How on earth do you work out how much you are going to have coming in to live on beforehand.

jacquie

ABN wrote:

Your hubby is a similar age to me :0

Are the figures for the first pension p/a (as assumed by edinvestor) or are they the amount of the pension fund?

They are per annum.

The reason I ask is that he must only been paying into that fund for about 15yrs and "normal" salaries in those days were fairly low. I was paying into a company pension fund for a similar time and my expected pension from that fund is around £750 p/a at 65.
But perhaps he had a much better job than I, electronics engineers were not that highly paid, or had a damn good pension scheme.

He was only in the pension scheme 11 years. Never paid a PENNY. All paid for by the firm. Apparently very well invested. He was a maintenance fitter.

EdInvestor

Jacqui

The way buyout bonds work is that a transfer value goes from the original final salary scheme to the insurance company.This includes an amount of "GMP" ( Guaranteed Minimum Pension) which is the amount your husband would get if he were still contracted into SERPS /S2P, the state second pension. With some buyout bonds, this GMP is uprated by a set amount over the years.

The original money would have been invested by the insurance company (usually in its with-profits fund) and the general idea in the past was that the stockmarket would grow sufficiently that the fund would eventually pay out more than the GMP and thus the pensioner would benefit from leaving the original scheme.

Up until the end of the millenium this was generally the case, but since then annuity rates have plummeted and so did the stockmarket, and thus most WP funds are half the size they were before, and also growing very slowly because the companies now must put money in safe bonds to back the kind of guarantee your husband has got.

And of course the insurer all along had guaranteed to make up the difference if there was a shortfall.

You might perhaps like to write to the insurer and ask for a projection of the likely value of the pension at maturity, just so you know you're on the right track.It's a bit hard to know what's going on if it was a non contributory pension - presumably you never even saw the transfer value ( the starting amount that was sent by the company to the insurance co)?

jacquie

EdInvestor wrote:

Jacqui

The way buyout bonds work is that a transfer value goes from the original final salary scheme to the insurance company.This includes an amount of "GMP" ( Guaranteed Minimum Pension) which is the amount your husband would get if he were still contracted into SERPS /S2P, the state second pension. With some buyout bonds, this GMP is uprated by a set amount over the years.

The original money would have been invested by the insurance company (usually in its with-profits fund) and the general idea in the past was that the stockmarket would grow sufficiently that the fund would eventually pay out more than the GMP and thus the pensioner would benefit from leaving the original scheme.

Up until the end of the millenium this was generally the case, but since then annuity rates have plummeted and so did the stockmarket, and thus most WP funds are half the size they were before, and also growing very slowly because the companies now must put money in safe bonds to back the kind of guarantee your husband has got.

And of course the insurer all along had guaranteed to make up the difference if there was a shortfall.

You might perhaps like to write to the insurer and ask for a projection of the likely value of the pension at maturity, just so you know you're on the right track.It's a bit hard to know what's going on if it was a non contributory pension - presumably you never even saw the transfer value ( the starting amount that was sent by the company to the insurance co)?

I will write to the insurer and request these details. The original amount transferred over was £11,864.73. Doesn't seem a lot really. I have a letter dated October 2002 from the IFA who got the figures to cash this fund in and I think they mentioned a transfer value of £52758 at that time.

EdInvestor

To be honest the size of pension - 8k/15k you're mentioning does seem rather high.

Let us know the outcome, and don't under any circumstances do anything to change/transfer/extract money from this pension until all the facts are clear.

Is there mention on your documentation anywhere of a "Guaranteed Minimum Pension" (GMP)? if so, how much is that?

Can your husband remember if he was contracted in or out of the State 2nd pension (SERPS) when he was at that job?

jacquie

EdInvestor wrote:

To be honest the size of pension - 8k/15k you're mentioning does seem rather high.

Let us know the outcome, and don't under any circumstances do anything to change/transfer/extract money from this pension until all the facts are clear.

Is there mention on your documentation anywhere of a "Guaranteed Minimum Pension" (GMP)? if so, how much is that?

Can your husband remember if he was contracted in or out of the State 2nd pension (SERPS) when he was at that job?

I have the policy documentation under -

Schedule of Benefits

When you reach Normal Retirement Date, a guarranteed pension of £8,674.08 a year will be payable. This guaranteed pension has a cash alaternative and will attract bonus pension.

Then under part 5 -

Limits

(I think this section is talking about taking over the liabibility of Scheme benefits and to meet with Inland Revenue requirements)

Pensions

For you at Normal Retirement Date-

£2,026.78 a year increased from 1 November 1985 (the date you left that employer's service) until Normal Retirement Date to coorespond with the increase which has taken place in the Retail Prices Index over that period.

Obviously just 2 bits I have quoted on but to me seem totally different. Would appreciate some clarfification on this if it makes sense to you.

DH can't really remember if he was contracted out of SERPs. He doesn't think he was.